Rumors about retailers can be very bad news for their health

April 13, 2009

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PacSun PSUN is feeling the downturn but is hardly at death's door, according to the Z-score data (see chart.) Even if same-store sales decline 20%, the company says, it will end 2009 with $25 million in cash.

Maria Sceppaguercio, spokeswoman for Ann Taylor ANN, says the chain doesn't belong on any likely-to-fail lists. Ann Taylor, she notes, ended 2008 with $112 million in cash. Its plan to close 163 of more than 1,000 stores was designed "to increase our efficiency, effectiveness and profitability and make the company an ever stronger one. Closing underperforming stores is a natural part of business of any smart retailer."

The complications of analyzing retailers' financials go beyond just a sound bite.

"It is very dangerous to speculate who may or may not be surviving without being inside the circle of knowledge," says Janet Hoffman, global retail managing partner at the consulting firm Accenture. "There could be alternatives (the retailer) may be pursuing without going out of business."

The "rumor mill," says Hoffman, could prompt "vendors to stop supplying product and creditors to stop extending credit." In the case of bigger-ticket items like appliances or jewelry, it could even cause consumers to "get concerned and stop shopping there," she says.

The lists of experts

Those being quoted in the death-watch articles say they do their homework on troubled retailers.

Investment banker, retail consultant and popular media interviewee Howard Davidowitz says he looks at "current trends," including a retailer's monthly sales, when its debt comes due, and economic data such as unemployment figures. He says he only publicly disparages the prospects of retailers after others have already done so.

For example, he says it should come as no surprise to Zales investors that he's been saying the jewelry store chain is doomed, as "everyone in the jewelry business knows Zales' situation. They didn't need me to say it."

Zales VP and Treasurer David Sternblitz, who cites the 2,000-store chain's "significant liquidity" and the fact that it is closing just 5% of total stores — says news articles and TV segments predicting their demise "increase the level of questions" from vendors and lead to calls from customers asking about the warranties on their jewelry.

While Davidowitz has long been retail's unofficial devil's advocate, the recessionary stars have aligned to give new credence to naysaying by him, as well as by consumer trends expert Britt Beemer. Both have long predicted the demise of Sears Holdings SHLD, which now owns Kmart: Davidowitz says he was criticizing Sears even when the stock was close to $200 and "everybody thought I was crazy." It closed last week at $52.49.

In October 2002, Davidowitz told the New York Daily News that Kmart "is headed to liquidation. It's just too far gone to save." Two years later, he told Westchester County, N.Y.'s The Journal News, "My prediction is in three years there will be no more Kmart; in six years, no more Sears."

But while the stock has fallen as retail sales have declined, credit-rating agencies' ratings don't agree with any doomsday scenario for Sears and Kmart.

Moody's downgraded Sears to Ba2 on March 23, but even that lower rating implies just a 2.5% chance it would default on its loans in a year. And even in the challenging fiscal year ended in January, the company generated free cash flow, which factors in the costs to upgrade facilities, of nearly $500 million.